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In many states, one common element of a Management Services Organization (“MSO”) structure is the need for a separate company to provide medical services to avoid the corporate practice of medicine.
In this structure, a “Friendly Professional Corporation,” or “Friendly PC” in short, is needed to provide, bill, and collect for medical services provided to patients. This Friendly PC is often wholly owned by a single physician, who is not otherwise an owner of the MSO. After medical fees are collected and medical related salaries are paid by the Friendly PC, it pays the MSO management fees and reimburses expenses. The goal is often to “zero out” the Friendly PC to achieve zero taxable income and zero loss at that level of the overall structure.
While this concept is straightforward, it can be cumbersome to achieve with the timing of collections from insurance companies and other parties at year-end. This creates tax inconveniences for both the owner of the Friendly PC and the owners of the MSO.
There is a 2020 IRS private letter ruling (PLR 202049002) that offers an alternative solution to this tax issue. In this ruling, the IRS allowed one consolidated federal income tax filing for the MSO and Friendly PC, even though the ownership of the companies did not otherwise meet a common 80% ownership test.
There were several factors in play that allowed this treatment. Of note was the management services agreement between the companies effectively gave the MSO a tremendous amount of control over the PC, which was not otherwise profitable or paying dividends to its owner. The benefit of a consolidated federal tax filing is that the MSO would record the combined income and expenses of both companies in a single federal income tax filing, eliminating the timing issues that can occur with two separate tax filings.
It is important to note that in the IRS private letter ruling, the companies were C corporations, not S corporations, or partnerships. It is also important to understand that private letter rulings, while they provide an indication of IRS thinking on an issue, are individualized letters written to a particular taxpayer on a specific issue. As such, they may not be relied on as precedent by other taxpayers.
The takeaway from this ruling is there could be an additional tool for consideration in federal tax filings when a separate Friendly PC is needed in the MSO structure. As with all tax strategies, you should carefully review your facts with your CPA to determine the applicability for your business.
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